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Trading and social enterprise

Information about raising money through trading and forming social enterprises.

What is it?

Trading is the activity of buying and selling goods or services. Many charities trade products and services to help generate income, which can subsidise other activities, for example where the beneficiary is unable to pay for the full cost of the service.

The term social enterprise refers to the process of applying a business solution to a social problem. A social enterprise generates profit, which is reinvested into its social purpose. Unlike a commercial business, a social enterprise aims to achieve both a social and financial return.

Although social enterprises have been around for hundreds of years, the model has become much more popular in recent years as a way of tackling big social problems in a financially sustainable way. Support and recognition from government have grown, and there is more public awareness about ethical trading.

Social enterprise is not a legal term. A social enterprise could be a limited company, a charity or a community interest company, or it could have a range of other legal forms.

Why do it?

Traded income is ‘unrestricted’. Unlike grants or contracts, income from trading does not come with any limitations on what you can spend it on, as long as you stay within your charitable objectives or the limits of your governing documents.

This means it can be very useful for covering core administration costs (which can be hard to fundraise for), or for testing out new projects.

However, trading may also require different skills than what you may be used to. Your income can be unpredictable, and you need to know how to forecast your cashflow to make sure you have enough money to pay salaries, bills and suppliers, while still delivering your services.

It requires hard work and persistence to turn a profit, but it can be a very rewarding experience that will give you the financial flexibility to grow your organisation or respond to the changing needs of your beneficiaries.

When is trading useful?

Trading is not right for all organisations, but it can be a natural option for organisations that might have developed products and services with grant funding, and now have a thorough understanding of the market that they’re working in, as well as a tried and tested product.

If you’re starting to think about trading for the first time, don’t plan on doing everything at once. Launch one product or service at a time – get to know how your customers respond and develop a more realistic picture of your sales income. You can then start to think about new products and new markets.

Don’t try to trade if you don’t have something to sell and someone to sell it to – some voluntary activity will always need to be subsidised, as there simply isn’t a market for it. Alternatively, you may trade in a different way by selling your services under contract to the public sector.

How to start trading

Before you start, you need to work out whether your trading idea is viable – in other words, will it generate enough income to turn a profit. It may take several years before you get to this point, but as long you plan for this, you may end up with a successful social enterprise.

Start by thinking about:

what your product or service is (is it your core service, for example gardening services run by ex-offenders to help them access long term employment, or is it a completely unrelated product, like Christmas cards or the leasing of rooms in your building).

who your customers are (they may be individuals, other organisations, the public sector or commercial businesses)

Next, you’ll need to get as much information as you can to help you forecast your income and expenditure. Some basic market testing can help you do this. The more information you can get about your costs and likely income, the more robust and realistic your forecast will be.

Finally, it can be helpful to put together a business plan to sell the idea to your board, your supporters or potential social investors. A business plan is also a useful tool to help you work out how and why you’re going to carry out your trading activity.

Who to involve

Customers

You may need to develop new relationships with customers who are paying for your products and services. This can be a very different relationship to the one you have with a donor or a grant funder. It’s useful to involve your potential customers as your develop your idea – invite them to share feedback on your idea or on a prototype product or service. This can make them feel some ownership of the idea, and build excitement for launch.

Chief executive and board

Your chief executive and board will need to have a good understanding of the risks associated with trading (financial, legal and reputational), and will need to work with someone with financial knowledge to forecast and plan ahead for any periods when sales are slow.

The board will need to make sure that any trading activity doesn’t compromise the long-term objectives of the organisation, and it may need to take legal advice on what kind of trading activity you are allowed to undertake.

Communicators

You’ll need some good communicators to help you market your product or service, and develop your brand.

Volunteers

Importantly, you should talk to your volunteers. They may not have signed up for selling things, so talk to them about how they want to get involved.

You may also need some funding to get you going – Social Enterprise UK has a good list of places where you can find funding for social enterprise.

Trading and mission

It’s important to think about whether your trading idea is in keeping with your organisation’s mission or not. In legal terms, this is called ‘non-primary purpose’ or ‘primary purpose trading’, and it can have tax implications. It’s important to strike a balance between the activities that generate a profit and those that have an impact on beneficiaries (though these activities may overlap). Read more about this in our exploring trading section.